The Impact of the ACA's Medicaid Expansion on Hospitals ...

ISSUE BRIEF MAY 2017

The Impact of the ACA’s Medicaid Expansion on Hospitals’ Uncompensated Care Burden and the Potential Effects of Repeal David Dranove

Craig Garthwaite

Christopher Ody

Walter McNerney Distinguished Professor of Health Industry Management Kellogg School of Management Northwestern University

Associate Professor of Management and Strategy Kellogg School of Management Northwestern University

Research Assistant Professor Kellogg School of Management Northwestern University

ABSTRACT

KEY TAKEAWAYS

ISSUE: By increasing health insurance coverage, the Affordable Care Act’s Medicaid eligibility expansion was also expected to lessen the uncompensated care burden on hospitals. The expansion currently faces an uncertain future.

The Affordable Care Act’s Medicaid expansion has significantly reduced hospitals’ uncompensated care costs.

GOAL: To compare the change in hospitals’ uncompensated care burden in the 31 states (plus the District of Columbia) that chose to expand Medicaid to the changes in states that did not, and to estimate how these expenses would be affected by repeal or further expansion.

Safety-net hospitals with high total uncompensated care costs have seen the greatest financial benefits.

METHODS: Analysis of uncompensated care data from Medicare Hospital Cost Reports from 2011 to 2015. FINDINGS AND CONCLUSIONS: Uncompensated care burdens fell sharply in expansion states between 2013 and 2015, from 3.9 percent to 2.3 percent of operating costs. Estimated savings across all hospitals in Medicaid expansion states totaled $6.2 billion. The largest reductions in uncompensated care were found for hospitals in expansion states that care for the highest proportion of low-income and uninsured patients. Legislation that scales back or eliminates Medicaid expansion is likely to expose these safety-net hospitals to large cost increases. Conversely, if the 19 states that chose not to expand Medicaid were to adopt expansion, their uncompensated care costs also would decrease by an estimated $6.2 billion.

If all nonexpansion states were to expand Medicaid, total uncompensated care costs would fall by an estimated $6.2 billion.

The Impact of the ACA’s Medicaid Expansion on Hospitals’ Uncompensated Care Burden 2 and the Potential Effects of Repeal

BACKGROUND Prior to the Affordable Care Act (ACA), childless, nondisabled adults were ineligible for Medicaid in most states. The ACA allowed states to expand eligibility to nonelderly adults with incomes up to 138 percent of the federal poverty level (roughly $16,400 for an individual and $33,600 for a family of four in 2017). As of March 2017, 31 states and the District of Columbia had expanded Medicaid, while 19 states had not.1

FINDINGS Uncompensated Care Declines in Expansion States Are Substantial Relative to Profit Margins To identify trends in uncompensated care burdens for hospitals in expansion and nonexpansion states, we used data from Medicare Hospital Cost Reports to create a sample of 1,154 hospitals that report financial data for the calendar year. Focusing on hospitals within the 75th percentile, 50th percentile, and 25th percentile of the

One intended benefit of the Medicaid expansion was to

uncompensated care cost distribution, we found that

reduce uncompensated care burdens that hospitals face.

between 2013 and 2014, these costs markedly declined in

Uncompensated care is any treatment or service not paid

expansion states, and this downward trend continued

for by an insurer or patient. We define uncompensated

into 2015 (Exhibit 1). The trajectories of uncompensated

care costs as the sum of a hospital’s losses on both charity

care costs were similar for hospitals across the three

care (when hospitals forgo or reduce the cost of care)

percentiles. In contrast, we found no similar break from

and bad debt (when hospitals bill for services but cannot

historical trend in nonexpansion states.

collect payment).

The decline in uncompensated care costs in expansion

Our previous research, detailed in a 2016 Health Affairs

states is economically meaningful. For example, the share

article, found that hospitals in Medicaid-expansion states

of uncompensated care costs between 2013 and 2015

experienced a sizeable reduction in their uncompensated

fell from just over 6.2 percent to just under 3.7 percent

care costs between 2013 and 2014, from 4.1 percentage points to 3.1 percentage points of operating costs.2 To see if this uncompensated care decrease has continued, we extended our analysis to 2015 and explored which hospitals saw the greatest decreases in uncompensated

of operating costs among hospitals with high burdens. Overall, this is a cumulative decrease of roughly 40 percent. The decreases among hospitals with medium and low uncompensated care burdens were smaller but also meaningful: 2 percentage points and 1.2 percentage points

care costs.

of operating costs, respectively.

This issue brief is intended to guide decisions around

These results suggest that all hospitals benefited from

a possible ACA repeal and further state Medicaid expansions, as well as inform policies aimed at alleviating hospitals’ uncompensated care burden. In 2015, U.S. hospitals provided a total of $35.7 billion in uncompensated care, according to the American Hospital Association.3 However, this burden is unevenly

the expansion and that the hospitals that had the highest levels of uncompensated care prior to 2014 benefited the most. Pooling the hospitals in expansion states together, we found that uncompensated care costs decreased between 2013 and 2015 from 3.9 percentage points to 2.3 percentage points of operating costs, a decline of 1.6

distributed. Safety-net hospitals care for a larger-than-

percentage points of operating costs.

typical share of low-income and uninsured patients. In

These reductions in uncompensated care costs are

the past, Medicare and Medicaid disproportionate share hospital (DSH) payments provided significant financial relief to safety-net hospitals. But the ACA mandates a sizeable reduction in DSH payments.

commonwealthfund.org

substantial relative to hospital profit margins. Roughly 40 percent of hospitals in our sample had operating margins less than 1.6 percentage points of operating costs in 2011.

Issue Brief, May 2017

The Impact of the ACA’s Medicaid Expansion on Hospitals’ Uncompensated Care Burden 3 and the Potential Effects of Repeal Exhibit 1

Uncompensated Care by Medicaid Expansion Status, Year, and Percentile of Exhibit 1. Uncompensated Care by Medicaid Expansion Status, Year, and Uncompensated Care Care Percentile of Uncompensated Nonexpansion

Uncompensated care

Expansion

75th percentile

75th percentile

50th percentile

50th percentile

25th

25th percentile

percentile

0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

2011

2012

2013

2014

2015

Year Medicaid expansion took effect Note: Uncompensated care is presented as a share of operating costs.

Note: Uncompensated care is presented as a share of operating costs. Data:2011–2015 2011–2015 Medicare Hospital Cost for Reports, forsample a balanced sample of 1,154 hospitals. Data: Medicare Hospital Cost Reports, a balanced of 1,154 hospitals.

For Every Dollar of Uncompensated Care Costs Hospitals in Expansion States Had in 2013, the ACA Erased 41 Cents by 2015 While hospitals in nonexpansion states did not experience dramatic declines in uncompensated care costs between 2013 and 2015, they did see small declines in these costs of 0.3–0.4 percentage points. To identify how much hospitals saved in uncompensated care costs from the Medicaid expansion versus other market changes, we conducted a trend analysis, computing the average change in uncompensated care costs from 2013 to 2015 (Exhibit 2). Hospitals in Medicaid expansion states saw their uncompensated care costs decline by 0.53 percentage points between 2013 and 2015 for each additional percentage point of uncompensated care costs in 2013. In comparison, hospitals in nonexpansion states saw their uncompensated costs fall by only 0.12 percentage points for each additional percentage point of uncompensated costs.


Overall, these estimates suggest that Medicaid expansion cut every dollar that a hospital spent on uncompensated care by 41 cents between 2013 and 2015.4 Scaling these numbers to all hospitals in the 31 states (plus the District of Columbia) that expanded eligibility suggests that offering Medicaid to nonelderly adults reduced uncompensated care costs in these states by nearly $6.2 billion.5 If the 19 nonexpansion states were to expand Medicaid, uncompensated care in those states would fall from 6.1 percent of operating costs to an estimated 3.6 percent. This would reduce uncompensated care by $6.2 billion, the same amount as in the 31 states (plus D.C.) that expanded Medicaid. That is because prior to the ACA taking effect, hospitals in both groups of states had the same amount, dollarwise, of uncompensated care. Despite being much smaller in population than the expansion states, the nonexpansion states tend to have higher uncompensated care burdens.



Exhibit 2

Change in Uncompensated Care Costs, 2013–2015 by 2013 Uncompensated Care andinMedicaid Expansion Status ExhibitCosts 2. Change Uncompensated Care Costs, 2013–2015 Change in uncompensated care, 2013–2015 Expansion

0.04

Nonexpansion

0.02 Slope = −0.12 0 Effect of Medicaid expansion

-0.02 -0.04

Difference in slopes = −0.41

-0.06 -0.08 -0.1

Slope = −0.53 0

0.02

0.04

0.06

0.08

0.1

0.12

Uncompensated care, 2013 Notes: Uncompensated is presented asoperating a sharecosts. of operating costs. Hospitals are placed based on care theircosts. 2013 care costs. For each Notes: Uncompensated care is care presented as a share of Hospitals are placed into bins based on their into 2013 bins uncompensated Foruncompensated each bin, we then calculate the average bin, wein calculated thecare average change uncompensated care costs 2013 2015. Bins for states bins nonexpanchange uncompensated costs from 2013 in to 2015. Bins for expansion states arefrom presented as to blue crosses, bins forexpansion non-expansion statesare are presented presented as as redteal xses.dots, The red line for is a regression sion statestheare presentedhospitals, as orange dots. The line isline a regression line through theFor nonexpansion hospitals, teal line is care a regression line through line through nonexpansion and the blue lineorange is a regression through the expansion hospitals. computing the least squares and lines,the uncompensated values above or below the thepercentile expansion hospitals. computing the least squares lines, uncompensated values above belowabove the 2.5 percentile or the 97.5 percentile are replaced 2.5 or 97.5 percentileFor are replaced with values at those respective percentiles. For creating care the bins, we replace all or hospitals 13 percentage points of operating costs with 13 percentage points of operating costs. percentiles. For creating the bins, we replace all hospitals above 13 percentage points of operating costs with 13 percentage with values at those respective points of operating costs. Data: 2011–2015 Medicare Hospital Cost Reports, for a balanced sample of 1,154 hospitals. Data: 2011–2015 Medicare Hospital Cost Reports, for a balanced sample of 1,154 hospitals.

Medicaid Expansion Reduced Uncompensated Care Burdens for Safety-Net Hospitals Not “Made Whole” by Medicaid DSH Payments We also explored how the Medicaid expansion specifically impacted uncompensated care costs in safety-net hospitals compared to other hospitals. First we divided hospitals by their share of patients on Medicaid, which is one common measure of whether a hospital is a safety-net provider (Exhibit 3). In expansion states, hospitals with the highest Medicaid shares in 2013 had slightly larger decreases in uncompensated care costs than hospitals with the lowest shares (0.020% vs. 0.011% of operating costs). While statistically significant, the relationship is weak. This finding does not suggest that “safety net” hospitals are not benefiting from the Medicaid expansion. Instead, it indicates that looking only at Medicaid share is inadequate for identifying safety-net hospitals. To illustrate this point, we categorized hospitals by their total uncompensated


and undercompensated care burden (Exhibit 4).6 This analysis considered shortfalls from all low-income patients, including the uninsured as well as those covered under Medicaid and the Children’s Health Insurance Program. We also included safety-net compensation that is tied to serving these patients, such as Medicaid DSH payments, to determine whether these supplemental payments provide adequate financial assistance. This analysis provides strong evidence that hospitals with higher overall uncompensated and undercompensated care burdens in 2013 benefited more from the Medicaid expansion than hospitals without large low-income populations. For example, among hospitals with the highest burdens, those in expansion states saw uncompensated care costs decrease by 2.6 percentage points more than hospitals in nonexpansion states. By contrast, among hospitals with the lowest safety-net burdens, those in expansion states saw uncompensated care costs decrease by only 0.7 points more than hospitals in nonexpansion states.



Exhibit 3. Uncompensated Care Costs by Medicaid Share, 2013–2015 2013

2015

Change, 2013–2015

Expansion states

0.049

0.029

−0.020

Nonexpansion states

0.061

0.057

−0.004

−0.012

−0.028

−0.016

Expansion states

0.039

0.023

−0.016

Nonexpansion states

0.053

0.055

0.002

−0.014

-0.031

−0.017

Expansion states

0.030

0.019

−0.011

Nonexpansion states

0.033

0.032

−0.001

−0.003

−0.013

−0.010

High 2013 hospital Medicaid share (>11%)

Difference

Medium 2013 hospital Medicaid share (3.9%–11%)

Difference

Low 2013 hospital Medicaid share (7.9% of operating costs)

Difference

Medium 2013 burden (4.7%–7.9% of operating costs)

Difference

Low 2013 burden (